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McKinsey Consumer & Shopper InsightsUnderstandingChina’s GrowingLove for Luxury McKinsey Insights China
McKinsey Consumer & Shopper InsightsUnderstanding China’sGrowing Love for LuxuryYuval AtsmonVinay DixitGlenn LeibowitzCathy WuThe authors would like to acknowledge the contributions ofBrian Salsberg, Max Magni, Rachel Zheng, Jia Liu, Lilian Li, McKinseyand Cait Murphy. Insights China
McKinsey Insights ChinaUnderstanding China’s Growing Love for Luxury 5 Executive summary 6 Luxury unleashed 10 The new sophisticates 14 The next wave of growth 20 The way forward for luxury players in China 24 About the research 32 McKinsey Insights China 33
McKinsey Insights ChinaUnderstanding China’s Growing Love for Luxury 7 Stride through China’s gleaming new high-end shopping malls and glitzy boutiques, and expect to see shoppers on a mission. China’s swelling class of wealthy consumers have the cash, and are willing and able to spend it on what, just until a few years ago, was well beyond their reach. Today, luxury goods are the de rigueur symbols of wealth and social status in China. The world’s priciest and most prestigious luxury brands are scrambling to erect massive retail shrines in urban China’s toniest shopping districts. Louis Vuitton now has 36 stores in 29 cities across mainland China, compared to stores in just 10 cities in 2005. Gucci has expanded even faster, starting with just six stores in the beginning of 2006, ramping up to 39 stores today. Hermes quadrupled its stores from five in 2005 to 20 today. There’s a reason for the rush: while many other markets are flat or shrinking, luxury goods are booming in China. Even in the teeth of the global recession in 2009, luxury goods saw 16% sales growth, a moderate slide from the 20% level of the previous few years, but still far better than many major luxury markets. Sales in that year hit RMB 64 billion (about US$ 10 billion). Robust economic growth rekindled the market in 2010, and, according to our research, the market is on track to reach 180 billion in 2015 (US$ 27 billion at fixed exchange rate). By then, China will account for over 20% of the global luxury market, overtaking Japan as the world’s largest luxury market (Exhibit 1). Exhibit 1 Chinese luxury consumption is projected to grow 18% annually from 2010 to 2015, accounting for over 20% of the global luxury market Luxury goods consumption1 in China 1998-2015 Billion RMB2 CAGR ~180 (‘10-‘15) 18 80 55 64 5 Global share 1998 2008 2009 2010E 2015E Percent 1 6 8 10 20 1 Luxury goods include fashion ready to wear, leather goods/handbags, watches and fine jewelry 2 2010 real RMB SOURCE: McKinsey Insights China - Wealthy Consumer Studies (2008, 2010); Deutsche Bank; interviews; literature search
8 Who are China’s luxury consumers? What are they looking for? How do they make decisions? And how do they differ from their counterparts elsewhere? To answer these questions, McKinsey conducted an extensive survey of over 1,500 luxury consumers across 17 cities in the Spring of 2010. Our research paints a picture of a rapidly growing pool of increasingly sophisticated and discerning consumers of luxury goods in China. This report highlights three key findings of relevance to luxury goods marketers in China. First, rapid increases in wealth, and shifting social mores that sanction the display of that wealth, are driving a growing infatuation for luxury goods among Chinese consumers. Second, access to an explosion of information on the internet, an increasing penchant for overseas travel, and first-hand experience purchasing and consuming luxury goods are contributing to a substantial rise in sophistication among luxury consumers in China. Contrary to popular belief, a growing number of Chinese luxury consumers are exhibiting a noticeable trend away from overt displays of wealth, and towards more understated forms of luxury consumption. And third, rapid urbanization and growing wealth outside of China’s largest cities is driving the emergence of several new geographic markets with sizeable pools of luxury goods consumers. Over the next 5 years, we expect that the number of such cities will double from 30 to 60.
McKinsey Insights ChinaUnderstanding China’s Growing Love for Luxury 9
McKinsey Insights ChinaUnderstanding China’s Growing Love for Luxury 11 Until recently, few people in China have earned enough income to buy anything beyond the bare necessities. With no pension to look forward to, a creaky healthcare system, and little or no insurance coverage, consumers have had to squirrel away every last renminbi. For millions of people, however, this story is changing. Rapidly rising incomes, the wide availability of luxury products and information about them, and shifting social attitudes towards the display of wealth, are changing how Chinese consumers view – and consume – luxury. Sources of growth Consumers are becoming more comfortable with treating themselves to luxury goods. These new luxury consumers, of which a growing number are residents of lower-tier cities, are reshaping the luxury landscape in China. Among China’s wealthy households, those with annual incomes between RMB 300,0001 and 1 million (US$ 45,000 – 150,000) comprise a reliable base of customers that is growing at 15 percent a year. By 2015, 5.6 million households will fall under this income category. The ranks of the very wealthy – those with household income of more than RMB 1 million (who typically own assets greater than RMB 10 million) – are growing even faster, at about 20 percent a year, reaching 1 million households by 2015. This group will drive 38% of the growth in the luxury market over the next five years (Exhibit 2). Exhibit 2 Luxury consumption growth will be primarily driven by upper middle class and wealthy consumers Wealthy (300k+) Upper middle class (100-200k) Aspirants (55k) Mass Affluent (200-300k) Lower middle class (55-100k) Share of urban households by household CAGR Share of luxury goods consumption CAGR income class (’10-’15) by household income class (’10-’15) Millions of households, Percent Percent Billion RMB1, Percent Percent 223 273 4 ~80 ~180 18 200K 2 4 2010 2015 CAGR 100-200K 6 1MN2 0.2 0.4 20 300K-1MN 1.2 2.0 15 1MN2 26 200-300K 0.7 1.2 18 33 25 28 43 55-100K 54 300K-1MN 45 43 0 37 15 200-300K 5 4 18 55K 38 100-200K 12 25 -4 22 34 55-100K 11 -6 55K 3 1 0 -6 2010 2015 2010 2015 1 2010 real RMB 2 Including households with assets over 10MN SOURCE: McKinsey Insights China - Wealthy Consumer Studies (2008, 2010); team analysis 1 In 2008, wealthy households in China were defined as those with household income more than RMB250K in nominal terms
12 China’s love for luxury is rapidly trickling down to broader swathes of consumers, even those who by traditional standards would not be considered viable target consumers of luxury goods. This is creating new opportunities as well as challenges for luxury goods marketers accustomed to serving only the very wealthy. China’s 13 million upper-middle-class households (with incomes between RMB 100,000 and 200,000, the equivalent of US $15,000 to $30,000) are stretching their budgets to purchase luxury watches, jewelry, handbags, shoes, and clothing – goods that until very recently were the exclusive domain of the wealthy. Many of these consumers sock away cash until they can afford their prized possession. “I will buy a Tiffany necklace on my birthday as a reward for myself,” one consumer confessed, “and then I plan to buy a Rado watch later this year after I get a bonus.” Although upper-middle class consumers can only afford the occasional luxury purchase, they account for about 12% of the market already. And their numbers are growing rapidly: we expect to see 76 million households in this income range by 2015, accounting for 22% of luxury goods purchases. Shifting attitudes One of the most striking characteristics that sets luxury consumers in China apart from their counterparts in other markets is their youth: 73% of luxury consumers are under 45, compared to just over a half in the U.S. As many as 45% of China’s luxury consumers are under 35, compared to 28% in Western Europe. Young children when China’s economic reforms started to gather steam, these consumers have never lived through an economic recession, and they’ve seen household income and property values steadily rise throughout their adult lives. They are extremely optimistic about their future and about their prospects for becoming richer: 64% believe their incomes will continue to grow significantly over the next five years. Close to half of all luxury consumers say that they believe in enjoying life today rather than worrying about the future. As a result, the percentage of Chinese consumers who are buying luxury products for personal indulgence is growing rapidly, rising from a quarter in 2008 to 36% in 2010. More than half say they buy luxury goods to “reward themselves for hard work and success.” And they’re doling out more for luxury: more than a third of Chinese consumers have traded up to more expensive brands and products in the last year, compared to only 6% of Japanese consumers. Chinese consumers of luxury are not just looking to buy more stuff. A growing number of them are seeking new experiences to round-out their luxury
McKinsey Insights ChinaUnderstanding China’s Growing Love for Luxury 13 lifestyle, splurging on spas, massages, and other wellness activities. Three- fourths of them belong to a gym or engage in sports activities frequently, compared to only one-fourth of mainstream consumers which by our definition earn less than RMB 200,000 (most of these consumers earn less than RMB 80,000) in disposable income per year. In fact, spending on luxury services is growing even faster than spending on luxury goods: 20% of luxury consumers said they’ve increased spending on experiences while only 13% said they were spending more on goods. China’s Four Categories of Luxury Consumers In the course of our research, we identified four distinct segments of luxury consumers in China by looking at the percentage of household income spent on luxury goods. Such spending serves as a proxy for the importance that consumers attach to luxury. More than half of luxury consumers are what we consider “core luxury buyers” - affluent households that spend between 12% and 20% of their income on luxury goods – a total of RMB 20,000-60,000 (US$ 3,000 – 9,000) on luxury goods a year. Three other consumer groups are increasingly important. Two of these– “luxury role models” and “fashion fanatics” – shape fashion trends (see below). Combined, they will make up one-third of the luxury market by 2015. The fourth group, whom we call “middle class aspirants,” is smaller but growing rapidly (Exhibit 3). Exhibit 3 Beyond “core luxury buyers”, 3 additional consumer archetypes are emerging in China Consumer archetypes 2010 2015 Luxury role models Average annual luxury consumption X% Share of luxury consumption Young and fashionable, most are self- Thousand RMB 15 X% Share of luxury households employed or corporate executives, living in Beijing or Shanghai 200 24% Buy to indulge themselves and seek to 2% feel unique rather than to show off wealth Luxury Fashion fanatics Role Models Middle class, typically in junior or mid- 160 19% level positions; includes some housewives 1% Spend a disproportionate share of income on luxury 120 Stronger “enjoy now” mindset, willing to Fashion buy on credit Fanatics Exert a strong influence on other Core Luxury 7% consumers, sharing their luxury 80 Buyers 5% 5% purchases and opinions in social circles 16% and online 61% 3% 65% 52% Middle-class aspirants Middle-Class 45% 32% 40 Middle class living in Tier 2/3 cities Aspirants 24 Infrequent buyers of luxury products 10% Buying luxury goods makes them feel 51% successful and fulfils aspiration of 0 belonging in a higher social circle -5 0 5 10 15 20 25 30 35 40 45 50 Less knowledgeable about luxury brands, Share of income and thus are more cautious spenders Percent SOURCE: McKinsey Insights China - Wealthy Consumer Study (2010)
14 “Luxury role models” are rich, young, and fashionable, living the quintessential luxury lifestyle. They make up only 1% of luxury consumers, but by 2015 they will account for 24% of spending. Most are self-employed or corporate executives, many of them living in Beijing or Shanghai. Many have studied or worked overseas, and their social circles include friends with second-generation wealth – so they have had long-term exposure to luxury brands. Luxury role models spend more than RMB 150,000 annually on luxury goods, or about 10% of their disposable income. They consider these items to be an essential part of their everyday life. Most (71%) have been buying luxury goods for at least five years, compared to only 34% for other luxury consumers. They often buy to indulge themselves and to feel unique rather than simply display their wealth. They also tend to buy spontaneously, snapping up an item if it strikes their fancy. Good service is important to them (44% of “luxury role models” said so, compared to 20% of all luxury consumers). They are sensitive to the attitudes of sales persons, and some told us they prefer to shop in stores outside China, where they believe the sales staff is more courteous. They reward good service with a return visit. While “fashion fanatics” are not rich (they typically make RMB 100,000 to 200,000, or US$ 15,000 – 30,000), and they make up only 3% of luxury consumers, their share of income spent on luxury is double that of other segments. These consumers spend up to 40% of their income on luxury products. They spend much of their free time learning about the latest fashion trends and they closely review seasonal offerings. They exert a strong influence on other consumers, sharing their purchases and opinions in social circles and online. And they spend more when they make more, which is happening fast: a third of them earn at least 20% more income than they did a year ago. Fashion fanatics want to be on the cutting edge of the latest trends, and they’ll borrow if that’s what it takes: 59% said they would buy on credit, compared to just 32% of middle class aspirants. They don’t seek out flashy products, but they like it when friends recognize a new purchase. Fashion fanatics enjoy planning purchases – visiting stores, researching products online, and talking to friends before they buy. Before buying a handbag, 59% said they seek out product information from more than three sources, compared to 41% of other luxury purchasers. They enjoy window shopping and visiting stores to see what’s new, and they care less about store service than do luxury role models. They are also more likely to buy a product after a recommendation or when they see celebrities wearing it. “Middle class aspirants” comprise 51% of luxury consumers, a number that will rise to 61% by 2015. By then, they will account for 16%
McKinsey Insights ChinaUnderstanding China’s Growing Love for Luxury 15 of spending, up from 10% today. Most earn between RMB 60,000 and 200,000 a year (US$ 9,000 -30,000), and hold a mid-level position in a local or multinational company. Many live in Tier 2 or Tier 3 cities with lower living expenses, which allows them to occasionally splurge on luxury goods. Their relatively conservative attitudes towards money mirror those of the average urban consumer: after spending money on a luxury item, they are likely to reduce spending on other things to keep their budget in check. This group spends RMB 5,000 to 15,000 per year (US$ 750 - 2,250) or 9% of their household income on luxury goods. They have less experience with luxury brands than the other groups, but they aspire to higher social circles and seek to stand out from the crowd. Buying luxury goods makes them feel successful. Since each luxury purchase can often constitute a large chunk of their income, they tend to be cautious and often invest significant time researching an item before buying. They may spend up to two or three months trawling the web for reviews and comments before plunking down their hard-earned cash. They are more likely to shop around to get the best priced luxury products (29% among middle class aspirants vs. 19% among fashion fanatics). Typically not as well-traveled as wealthier consumers, they are more inclined towards Chinese brands.
McKinsey Insights ChinaUnderstanding China’s Growing Love for Luxury 17 The exploding popularity of the internet, a growing penchant for overseas travel, and first-hand experience purchasing and using luxury products are giving Chinese consumers an unprecedented level of exposure to luxury. As a result, Chinese consumers of luxury are becoming increasingly savvy and discerning, particularly with regard to the relationship between value and price. Rising awareness of brands and prices With luxury stores sprouting up around China and the proliferation of magazines and websites dishing out information on the latest fashions, Chinese consumers are familiar with nearly twice as many brands today than two years ago. Half of the consumers we surveyed in 2010 could name more than three ready-to-wear brands, compared to only 23% in 2008. In 2008, the top five ready-to-wear clothing brands accounted for 83% of top-of-mind consumer recall. By 2010, that number fell to 62% as consumers have been exposed to a higher number of new brands (Exhibit 4). Exhibit 4 Consumer awareness of luxury brands is growing rapidly Share of top five brands mentioned Average number of brands mentioned 1 drops from ~80% to ~60% (Up to 3 brands) Percent of mentions of top 5 brands 2.3 Ready 1.2 83 62 to wear 2.2 Leather 1.3 87 66 goods 2.4 Watches 1.3 91 83 2.2 Jewelry 0.7 87 65 20082 20102 20082 20102 1 “Speaking of category name, what brands come to mind first? Please name up to 3 brands” 2 Comparison is done among wealthy luxury consumers in 2008 and 2010 SOURCE: McKinsey Insights China - Wealthy Consumer Studies (2008, 2010) As they become more familiar with luxury goods, Chinese consumers are becoming savvier about the relationship between quality and price. If in the past a steep price automatically signaled quality, fewer luxury consumers make that assumption today as they get better at assessing what luxury goods are worth. In 2010, only around half of all consumers equated the most expensive products with the highest quality ones, down from 66% of consumers in our 2008 survey.
18 Price transparency is certainly contributing to this dynamic. More than any other consumer segment in China, luxury consumers are avid users of online information sources, with 52% of them checking product details and prices online, compared to just 13% of all urban consumers. With around two out of three luxury consumers having made at least one overseas trip, consumers have access to external benchmarks for comparing prices back home. In 2008, for instance, only two out of five people knew that the price of luxury products in China was at least 20% higher compared to overseas markets such as Hong Kong. By 2010, 66% of consumers were well aware of this difference (Exhibit 5). Exhibit 5 As they gain more experience, consumers are becoming savvier about the price gap between Mainland China and overseas markets Knowledge about price gap has grown …and increases with their luxury significantly in the last 2 years consumption tenure 1 Percent of luxury purchasers who know the Percent of luxury purchasers who know the price gap between products sold in Mainland price gap between products sold in Mainland China and overseas is at least 20% China and overseas is at least 20% 72 66 63 54 43 2008 2010 5 years 5-10 years 10 years 1 Luxury tenure is the time since respondents bought their first luxury goods SOURCE: McKinsey Insights China - Wealthy Consumer Studies (2008, 2010) Interestingly, some luxury consumers derive satisfaction from knowing that an item is selling at a higher price than when they bought it. One consumer told us she only buys luxury bags with the potential to appreciate in value, adding that she is pleased to see the Chanel handbag she bought in 2008 for RMB 25,900 (US$ 3,700) was selling for RMB 30,800 in 2010 (US$ 4,500). The quest for authenticity Luxury marketers have waged a seemingly never-ending battle against counterfeit goods in China. Despite recent government efforts to step up enforcement, faux luxury will unlikely disappear anytime soon. Manufacturers, along with their lawyers, customs officials, and local police, continue to hunt down counterfeiters in one place, only to see them pop up again in another.
McKinsey Insights ChinaUnderstanding China’s Growing Love for Luxury 19 While Chinese consumers may have a hard time shaking off their reputation for their hearty appetite for knock-off luxury goods, the reality on the ground is slowly starting to change. Consumers are looking for the real thing, and they are increasingly willing and able to afford it. One trend underscored by our survey data casts a ray of hope for luxury marketers: Chinese consumers are expressing a growing appreciation for authentic luxury products. The percentage of consumers who said they were willing to buy fake jewelry has dropped significantly from 31% in 2008 to 12% this year. Some luxury buyers told us they were sure their friends would spot a counterfeit, a decidedly embarrassing situation. One woman who used her first salary check to reward herself with a luxury handbag told us “it would be meaningless if it was fake.” Half the consumers we spoke with in 2010 said better quality is an important reason to buy luxury goods, up from 36% in 2008. A well-known brand was the second-most important buying consideration, mentioned by 43%. For ready-to-wear clothing, leather goods, jewelry, and watches, quality and craftsmanship – which reflect a product’s heritage - are two of the top 3 consideration factors. And internationally well-known brands have replaced innovative design as one of the top 3 factors consumers consider when purchasing these goods. (Exhibit 6). Exhibit 6 “Internationally well-known brand” has become one of the top buying factors with “superior craftsmanship” continuing to be the most important Top 3 key buying factors for luxury purchases 2008 2010 Ready-to- 1. Good material 1. Superior craftsmanship wear 2. Superior craftsmanship 2. Internationally well-known brand 3. Innovative design 3. Good material Leather 1. Superior craftsmanship 1. Internationally well-known brand goods 2. Innovative design 2. Superior craftsmanship 3. Good material 3. Good material Jewelry 1. Innovative design 1. Superior craftsmanship 2. Superior craftsmanship 2. Innovative design 3. Timeless style 3. Internationally well-known brand Watches 1. Superior craftsmanship 1. Superior craftsmanship 2. Innovative design 2. Internationally well-known brand 3. Internationally well-known brand 3. Innovative design SOURCE: McKinsey Insights China - Wealthy Consumer Studies (2008, 2010)
20 Less flash, more understatement Contrary to the widely shared impression of Chinese luxury consumers, our study showed a growing number of them are shunning overt displays of wealth in favor of more understated modes of luxury consumption. More than half of China’s luxury shoppers say they want less showy fashion, up from only 32% in 2008. Forty-one percent say that showing off luxury goods exhibits poor taste, compared with 45% in Japan and 27% in US. One survey participant said she liked Hermès scarves, but wouldn’t wear them to work for fear that she would be seen as trying to outshine her boss.
McKinsey Insights ChinaUnderstanding China’s Growing Love for Luxury 21
McKinsey Insights ChinaUnderstanding China’s Growing Love for Luxury 23 Even with the proliferation of luxury stores in recent years, China is far from reaching saturation. Even with 20 stores, Hermès’ footprint in China still falls well short of its 45-store presence in Japan. Similarly, Chanel’s 50 stores in Japan far outstrips their 8 outlets in China. This is true for other leading brands: while impressive, Louis Vuitton’s 36 stores - including three each in Beijing and Shanghai – have yet to match its extensive presence in Japan, where it has 12 stores in Tokyo and another 45 in 27 cities. Rapid urbanization and growing wealth outside of China’s largest cities is driving the emergence of several new geographic markets with sizeable pools of luxury goods consumers. Over the next 5 years, we expect that the number of such cities will double from 30 to 60. While China’s largest cities, especially Beijing and Shanghai, will continue to remain centers of gravity, the market is likely to grow at a faster pace in smaller cities like Taiyuan, Changchun and Yantai. More small cities will become large enough to justify a luxury footprint. We expect luxury consumption in cities such as Qingdao and Wuxi to triple over the next 5 years, and by 2015 consumption in such cities will approach the level of Hangzhou and Nanjing today, which are among China’s most developed luxury goods markets. By 2015 luxury consumption could pass RMB 500 million (US$ 76 million) in more than 60 cities, compared to just 30 today. To ride the next wave of growth, it’s crucial to know which of China’s hundreds of cities are likely to deliver growth. Most marketers today rely on a widely- used system of ranking cities by “tiers,” based on GDP. In our research, we employed a somewhat different methodology that analyzes 650 cities based on the projected growth of household income, which we believe is a far more accurate indicator of potential spending power. GDP and income trends differ substantially across China due to industrial footprint (e.g. mining vs. manufacturing) and ownership structure (e.g. state owned vs. private). We therefore classified the cities by their stage of income development, from those that have already seen the rise of a sizeable upper middle class to those that are just beginning to develop the lower middle class (with household incomes between RMB 55,000 and 100,000, the equivalent of US$ 8,000 to 15,000). Understanding these dynamics can help companies make better, more timely investments. Among our findings (Exhibit 7): China’s top 36 cities – two mega, nine large markets, and 25 developed cities – will capture 74% of the growth in the luxury market from now through 2015, and will comprise 76% of the luxury market by then. —— The two mega cities - Shanghai and Beijing - together account for 21% of luxury consumption and will continue to retain their importance, capturing 19% of growth from 2010 to 2015.
24 Exhibit 7 Classifying cities by income development stage offers a better approach to prioritizing luxury market potential than the traditional city tier system Billion RMB1, Percent 2 mega cities TIER 2 CITY EXAMPLE 9 large cities 25 developed cities Though classified as T2 cities, income development varies significantly Tier 2 households by income in 2015 (Millions of households, percent) Remaining cities 71 1.5 3.8 1.0 300K 3 2 2 6 1 1 2 200-300K 3 18 36 100-200K 39 Beijing Wenzhou 56 Luxury spend 2010: 1.8 Luxury spend 2015: 4.0 CAGR, 10-15: 18% 57 Wuhan Wuhan Wenzhou Luxury spend 2010: 0.9 55-100K 40 47 Nanchang Luxury spend 2015: 2.8 CAGR, 10-15: 27% 24 Nanchang Luxury spend 2010: 0.2 22 Luxury spend 2015: 0.5 55K 16 14 CAGR, 10-15: 26% 11 Average Wenzhou Wuhan Nanchang T2 cities 1 2010 real RMB SOURCE: McKinsey Insights China; team analysis —— Nine large markets, Chongqing, Dongguan, Foshan, Guangzhou, Hangzhou, Nanjing, Shenzhen, Tianjin and Wenzhou account for one- third of luxury consumption today, and will still account for 30% by 2015. These markets will contribute 27% of the growth between now and 2015. —— The next 25 developed cities, including a few larger cities (in GDP and population terms) such as Xian as well as smaller cities like Taiyuan or Yantai, account for 25% of luxury consumption and are projected to take 26% by 2015. These cities will contribute 27% of growth from 2010 to 2015. The remaining 620 or so emerging cities will capture an additional 22% of the luxury market by 2015, comprising 26% of total growth in luxury spending between now and then.
McKinsey Insights ChinaUnderstanding China’s Growing Love for Luxury 25
McKinsey Insights ChinaUnderstanding China’s Growing Love for Luxury 27 Most of the world’s luxury players are either in China already or are contemplating significant investments to ramp up their presence. The stakes are high, but so are the challenges. Luxury marketers will need to tackle a host of key strategic issues before making their next move. Here are a few suggestions that draw upon some of the insights from our study, as well as our recent work in this area. Plotting your retail footprint As any luxury retailer can attest, finding the right location, from identifying the target city down to the actual store location, is an incredibly tricky business in China. Some luxury stores have been wildly successful, while others have languished and then quietly shuttered and relocated to more promising spots. While more small cities will become large enough to justify a luxury footprint, the market will remain concentrated in 36 cities. These will account for 74% of market growth between now and 2015, and 76% of total luxury sales by then (Exhibit 8). The upside growth potential remains sizeable even in China’s two seemingly well-covered megalopolises of Shanghai and Beijing: each city is far from being over-penetrated, and each remains a viable platform for the expansion of luxury retail footprints. We suggest that luxury companies establish a solid market presence in these cities before expanding elsewhere. Format is another key decision. In China’s big cities, stand-alone stores in top luxury shopping malls attract three to five times more traffic as other store formats, such as boutiques or department store concessions. Exhibit 8 Despite the growth of smaller cities, the top 36 markets will continue to account for over three-quarters of luxury sales in China Total luxury goods consumption Billion RMB1, percent Share of CAGR growth 2010-15 2010-15 100% = ~80 ~180 18 Top 2 cities 21 20 18 19 Top 36 30 17 27 Next 9 cities 33 cities 26 20 27 Next 25 cities 25 Rest of China 21 24 22 26 2010 2015 1 2010 real RMB SOURCE: McKinsey Insights China; team analysis
28 Delivering exceptional service in the store Delivering exceptional service in the store is critical. Indeed, among all of the possible consumer touch points, 44% of the luxury fashion buyer’s decision is influenced by what they experience inside the store: trying the product on, talking to a salesperson, and how products are displayed (Exhibit 9). Exhibit 9: In-store execution is still key, while the internet is gaining in importance and is now the second most important touch point for luxury buyers Relative importance of touch points in driving purchase1 Percent (N=2422) LUXURY FASHION GOODS 2 I saw an ad about this brand 11 on a website I evaluated the I checked reviews online product when I 13 9 (e.g. BBS/forum) was in the store Internet I saw this brand’s website 2 21 I spoke to the in-store 12 I received recommendations salesperson 9 Word of 14 44 In-store from friends/family Mouth I saw the product I saw others using it in person 5 13 displayed in the 11 Traditional 7 store/store window I read an article about this media Direct 11 marketing brand in the magazine I read the catalog 8 I saw a TV commercial 2 in the store I read an article on this brand 1 in the newspaper 1 Derived from the regression of whether consumers purchase products from a luxury brand with whether they have experienced a certain touch point before purchase and how the information via the touch point has impacted the perception of this brand (positively or negatively) 2 Includes ready-to-wear, bags, shoes, jewelry and watches SOURCE: McKinsey Insights China - Wealthy Consumer Study (2010) Two out of three consumers we surveyed continue to be disappointed with the indifferent attitudes of salespeople in the store. While the importance of service attitude has shot up from 17% in 2008 to 30% in 2010, many luxury marketers in China still under-deliver on service. Luxury marketers will have to deploy sales staff that are familiar with the latest fashion trends, exhibit exceptional levels of patience with Chinese shoppers who prefer to linger in the store, and are helpful without rushing customers or applying sales pressure. Louis Vuitton is one brand that has figured this out. They assign a specialist (sometimes the store manager herself) to spend time educating luxury shoppers about such things as the story of Louis Vuitton’s founding, the company’s deep European roots, and the way they handcraft leather goods. To ensure that specialists focus on their task of imparting the brand’s heritage, their compensation is not tied to store sales. In addition to better training, retailers should develop incentives that encourage sales people to spend more time educating consumers about the brand and developing deeper customer relationships. These might include
McKinsey Insights ChinaUnderstanding China’s Growing Love for Luxury 29 visits for high performers to company headquarters, or pure salary-based compensation to cultivate a stronger focus on consumer education over aggressive selling. Many luxury brands are beginning to invest in multi-tiered customer loyalty programs that are often linked to global IT systems so they can create a unified picture of their customers wherever they shop, whether it be in Paris, New York or Shanghai. With this information in hand, they can create very tailored marketing campaigns. Embracing digital marketing Once a channel frequently dismissed by luxury marketers, the internet is turning into the site of a fierce battle for the hearts and minds of China’s consumers. While the in-store experience is, by a wide margin, still the most important factor driving a consumer’s purchase decision, the internet has rapidly become the second most important consumer touch point for luxury categories such as fashion. Consumers in China spend a lot of time collecting basic brand and product information and reading what others have to say about the products they’ve set their hearts on buying. Social networking sites such as Kaixin001, RenRen and Youku, emerging third-party review micro-sites on Sina, and China’s ubiquitous bulletin-board services (BBS), are often the first stop for this kind of information. Marketers can work with a social media agency to monitor and react to online conversations among consumers, either by participating in the discussion or by connecting directly with customers. Luxury brands could identify influential bloggers and educate them about the brand. Some luxury players started to identify and reach out to potential brand ambassadors with the help of social media agencies. Lancome launched its own branded website with a very successful BBS forum. Some car companies invest in advertising on Autohome and XCar, the two most popular consumer auto websites in China, with millions of consumer generated comments each month. Social media firm CIC collects over 330,000 relevant comments a month covering a range of luxury goods. And these numbers are growing. On top of tracking and responding to online discussions, another emerging priority for luxury marketers is crafting their e-commerce presence. Traditionally loathe to offer their products directly online for fear of diluting their brand, many luxury brands are finding they have little choice but to establish a robust online presence. For many brands this might mean establishing an official presence even on consumer e-commerce sites such as Taobao, which handled online transactions worth around RMB 400 billion (US$ 61 billion) in 2010. Many luxury marketers are finding that their goods are being sold there anyway, and are establishing official Taobao sites that enable them to exert greater control over how their brand is presented online, even if they aren’t likely to generate substantial sales.
30 While luxury marketers continue to tread cautiously when it comes to e-commerce, a few are making bold moves, such as Armani, which in November 2010 launched a site that allows customers to place orders online. Tapping into cultural heritage A large part of the allure of luxury, particularly in more durable product categories which preserve their value over time such as jewelry, is the opportunity to share in the rich cultural heritage that is associated with a brand. This concept is rapidly catching on with Chinese consumers of luxury, and is playing a major role in how marketers assemble their strategies. Recognizing these considerations, many leading brands are promoting their company history and product craftsmanship. Several have organized small “museums” – sharing the history of the brand and showcasing designs from many decades ago, including some timeless ones that remain apparent in today’s products. Some have flown their artisans to China to showcase the painstaking craftsmanship that goes into the making of their products. A few have even taken their top customers to visit their factories and headquarters in Europe. Notably, while most Chinese consumers look for luxury products that have an international heritage, one-third said they would prefer to buy luxury products designed specifically for China and that incorporate Chinese imagery. This is especially true among emerging middle-class consumers (Exhibit 10). Exhibit 10 While looking for international heritage, newer luxury consumers demonstrate a growing preference for products designed specifically for China Percent that strongly agree or agree “I strongly prefer luxury products with Chinese influence rather than products with a strong Western image” Product designed for China is important, especially among new luxury buyers… … and also highly valued by tier 3 consumers 37 46 29 34 34 23 Luxury City tenure1 tier 5 years 5-10 10 years Tier 3 Tier 2 Tier 1 years 1 Luxury tenure is the number of years since a consumer first purchased luxury goods SOURCE: McKinsey Insights China - Wealthy Consumer Study (2010)
McKinsey Insights ChinaUnderstanding China’s Growing Love for Luxury 31 China’s luxury customers appreciate the value of international brands, but they also want new product designs, labels or sub-brands that reflect China’s heritage. Among young and upper middle-class consumers, in particular, the desire for luxury products that draw on China’s rich cultural and historical heritage is evident – and some companies are responding. Hermès, for example, recently launched a Chinese brand, Shang Xia, with a store in Shanghai and others planned for Beijing and possibly Paris. The brand, developed in China by a Chinese team, will sell a wide array of products based on Chinese designs, with mostly Chinese craftsmanship and at price points that are two to three times lower than Hermès. This is still a fairly new phenomenon, however, particularly in the luxury segment, and will require tackling a bunch of thorny issues. Localizing a brand requires giving executives more authority over research, development and marketing. It also means a higher degree of local product tailoring than most luxury brands are accustomed to. Having established a strong foothold in China’s already fast-growing luxury mega-markets like Shanghai and Beijing, many brands are quickly making successful inroads into smaller cities that promise even faster growth. In the meantime, others are just getting their feet wet by studying the market, scouting for prime store locations and training up staff. Regardless of where you stand today, there’s one final piece of advice that we believe is relevant to all players: get granular. Granular in terms of identifying the most attractive markets, granular in the way you choose your store locations, and granular in how you target your customers and tailor your marketing approach. One size certainly does not fit all in a market as vast and varied as China.
32About theresearch In 2010, McKinsey Insights China interviewed over 1,500 luxury consumers across 17 cities. Combined with our 2009 wealthy consumer study and extensive urbanization model covering over 800 cities, this research offers a longitudinal view of China’s luxury market sizing, consumer attitudes and purchasing behavior, as well as a unique segmentation approach. The research consisted of: Face-to-face interviews of between 35 and 45 minutes with Chinese luxury consumers. Respondents were selected from 17 different cities across several geographic regions of China. Of these cities, three were Tier 1, nine were Tier 2, and five were Tier 3. The selection process ensured diversity of age, gender, occupation and other key demographic factors. Extensive interviews with brand managers and marketing specialists from leading luxury brands across a range of product categories. Factor analysis to identify key themes around consumers’ attitudes about their lifestyle and luxury consumption. Cluster analysis to arrive at a needs-based segmentation of luxury consumers.
McKinsey Insights ChinaUnderstanding China’s Growing Love for Luxury 33 McKinsey Insights China McKinsey Insights China provides businesses with the data, analytics and rapid, customized problem-solving and decision-making support to help build robust strategies for China’s rapidly changing marketplace. The data and analysis combine results from McKinsey’s annual Chinese consumer studies with proprietary macroeconomic and demographic data and analysis from the McKinsey Global Institute (MGI). McKinsey Insights China updates the macroeconomic models regularly – the national model every six months and city level model annually to retain the most recent view of the Chinese market at a highly granular level. These frequent updates ensure that the latest economic activities and policy changes are reflected in our forecasts of demographic, economic and consumption variables at the individual city level. Since 2005, we have conducted the largest study of Chinese consumers on an annual basis. We have interviewed more than 46,000 Chinese consumers across over 60 cities, giving us a deep understanding of Chinese consumers’ attitudes and spending behavior in more than 100 product categories. The respondents come from a wide range of incomes, ages, regions, city-clusters and city-tiers, and represent 80 percent of China’s GDP, 90 percent of its disposable income and 50 percent of the population. In 2008 and 2010, we conducted additional studies of over 3200 wealthy consumers with annual household incomes in excess of RMB 250,000, giving us unprecedented insight into the behavior of this fast expanding and economically important segment. McKinsey experts are at hand to offer guidance, including the facilitation of workshops to address specific business issues. In addition, we have a proprietary, pre-profiled panel of more than 12,000 mainstream Chinese consumers and 1,000 wealthy Chinese consumers to help further explore such issues in a timely fashion. For more information about McKinsey Insights China, please contact: Yuval Atsmon (firstname.lastname@example.org, +86 (21) 6133 4202) Vinay Dixit (email@example.com, +86 (21) 6132 3095) Lihua Li (firstname.lastname@example.org, +86 (21) 6133 4039) You can also email us at: email@example.com or visit our website at: http://solutions.mckinsey.com/insightschina